On fundamentals, the market continues to be fairly balanced. The supply side however continues to face shortfalls with the North Sea in particular seeing several cargoes delayed in October, with this week seeing the t..

13 Oct 2012

LONDON (Commodity Online): Crude oil markets drifted higher this week, breaking out from its relatively tight trading range. The upward momentum is partly driven by a deepening of geopolitical complexity, especially with headlines streaming from the Turkey-Syria border.

The front month Brent contract surged past the $115/bbl mark, to levels last seen in mid September, and registering relatively stronger gains than the equivalent WTI contract. As a result, the prompt month WTI - Brent differential has continued to widen, settling above $23/bbl over the week and reaching its highest value since late October 2011.

On fundamentals, the market continues to be fairly balanced. The supply side however continues to face shortfalls with the North Sea in particular seeing several cargoes delayed in October, with this week seeing the tally build up further again.

Also, in terms of outages, the situation in the 150 thousand b/d Shell-operated Nigerian Bomu-Bonny trunk line that predominantly carries premium Bonny Light crude has not seen any improvements. Repairs to the line have been delayed as the tanker used to clear the stolen crude is still on fire, increasing the difficulty in regulating supply.

While force-majeure has not yet been declared by the operator on its Bonny Light obligations, it has done so for its LNG deliveries. Further supply system weakness was highlighted in the latest oil production data from Azerbaijan.

Azeri output of oil and condensates in September is lower y/y by 73 thousand b/d (7.8%) to 867 thousand b/d. The weakness in output over the month is once again attributed to maintenance at its main fields. In the year-to-date, output is lower y/y by 10% and the weakness is in line with our expectations.

Overall, Barclays expects Azeri production to fall by 40 thousand b/d on average this year and by another 30 thousand b/d in 2013. Longer term, Azerbaijan is reducing its extraction rates from its oil reserves to extend the duration of production.

Also, officials at BP and SOCAR are saying that the geology of country's main oilfields Azeri-Chirag Guneshli has fallen short of original expectations.